09 Nov Mortgage Legislation: “Pointed” Questions For the ABI

As I discussed this week, Congress is seriously considering legislation to allow consumers to modify home mortgages. At the same time Sam Gerdano, the executive director of the American Bankruptcy Institute, threw cold water on the idea in an Associated Press interview. This leaves this long-time ABI member to wonder if the officially non-partisan ABI is actually becoming a shill for industry interests.

Mr. Gerdano is quoted as saying, “It seems to me people should be asking some pretty pointed questions on what the impact will be, particularly if we’re talking about 500,000” new cases. “There have never been that many in a year. Can courts handle that?” The comment alone is staggering in both its apparent meaning and its inaccuracy.

First, the inaccuracy: The bankruptcy system exceeded 500,000 cases filed per year in 1985 and has not looked back since. And we had at least a 500,000 case “surge” in 2005. Here are the statistics provided by his own organization. (But I’ll assume he was misquoted and meant that we have not had an increase of this scale in Chapter 13 filings, which is probably true. Assuming 500,000 new cases would all materialize immediately which is a leap Mr. Gerdano is willing to make in order to dramatize his point, apparently.)

More importantly, the massive insensitivity: Mr. Gerdano’s comment seems to say Congress should “ask pretty pointed questions” about the proposal because the bankruptcy system might be overburdened by so many refugees from The Subprime Meltdown of 2007. So let me get this straight, Congress triggered off a similar surge in filings in 2005 in an effort to limit consumer rights but a surge to save homes from foreclosure would be wrong?

I don’t think I misunderstand the executive director’s views on pro-consumer legislation here. He went on to comment that “Five hundred thousand of anything is going to have some impact…Maybe the earth will still spin, but no one is doing economic models which say, ‘Here is the impact.'”

“Maybe the earth will still spin?” Well, thank God for that! Consumer advocates won’t end life as we know it. I, for one, am relieved.

Of course, there was in fact a 500,000 case surge during a very short period between April and October, 2005. I don’t recall anyone insisting that economists model the impact of that predictable event and, in fact, we all know that the broad impact on the economy was statistical noise.

Mr. Gerdano confuses cause with effect. It would not be changes in the law that cause 500,000 additional households to file Chapter 13 but rather because they have no other choice to save their homes. The disaster is happening already — hundreds of thousands of homeowners face likely foreclosure in the next couple years. The industry is responding with press releases but not much else — and with the dispersed nature of responsibility, authority and limited capital, likely cannot do much else. Very few people endorse a public bailout of the industry or homeowners. So the choice really is between more Chapter 13 petitions or more foreclosures.

It would seem that the ABI ‘s executive director is more comfortable with skyrocketing foreclosures because the alternative is a lot of paperwork.

When even Moody’s Mark Zandi testifies the bills would not “significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuse…” perhaps some additional staff in the system is a small price for saving 500,000 homes. One can hope the ABI will be a greater “source of education” on bankruptcy legislation in the future.

I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors.
For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy.
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